Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company measures at fair value certain financial assets and liabilities. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:

Level 1— Quoted prices for identical instruments in active markets;

Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following tables summarize the fair value measurements as of September 30, 2018 and December 31, 2017 for the Company's financial instruments (in thousands):



	Fair Value Measurements as of September 30, 2018
Liabilities:	Total		Level 1	Level 2		Level 3
Foreign currency forward contracts	$	163	—	$	163	—
Derivative Warrant Liability	$	4,960	—	—		$	4,960



	Fair Value Measurements as of December 31, 2017
Assets:	Total		Level 1	Level 2		Level 3
Foreign currency forward contracts	$	508	—	$	508	$	—

Foreign currency forward contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates; therefore, they are classified within Level 2 of the valuation hierarchy.

In connection with the issuance of the Notes, on January 3, 2018, the Company issued to an affiliate of Hale Capital and another purchaser Warrants to purchase up to 6,006,667 shares of common stock at an exercise price equal to $1.00 per share (the “Warrants”). The exercise price of the Warrants and the number of shares of common stock to be purchased upon exercise of the Warrants is subject to adjustment upon certain events, including certain price-based anti-dilution adjustments in the event of future issuances of equity securities. The term of the Warrants is seven years from January 3, 2018. The Warrants contain a cash settlement feature contingent upon the occurrence of certain events defined in the Warrants. As a result of this cash settlement feature, the Warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the Warrants on the date of issuance was recorded in the Company’s condensed consolidated balance sheets as a liability.

The Warrant liability was recorded in the Company's condensed consolidated balance sheets at its fair value on the date of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded in the condensed consolidated statements of operations. During the three and nine months ended September 30, 2018, the Company recorded a non-cash loss from the change in fair value of the Warrant liability of 0.6 million and $1.1 million. The increase in fair value during the three and nine months ended September 30, 2018, was driven by the stock premium offered as part of the planned merger as discussed in Note 14 - Definitive Agreement. The Warrants include a repurchase election whereby, in the event of a change of control, the holders thereof may elect to require the Company to repurchase the Warrants at a purchase price equal to the greater of $5.0 million in the aggregate or the aggregate merger consideration payable for the shares underlying the Warrants net of the aggregate exercise price of $1.00 per share. On June 29, 2018, the Company entered into the merger agreement discussed in Note 14 - Definitive Agreement. Based on the $1.72 per share merger consideration, if the merger closes, the Warrants will be repurchased for $5.0 million in the aggregate.

The Company estimates the fair value of this liability using a Monte Carlo pricing model that is based on the individual characteristics of the Warrants on the valuation date, which includes assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument. In performing the fair-value analysis for the Warrant liability the Company engages the support of a third party valuation consultant.

Since the Warrant liability is recorded at fair value and is remeasured on each balance sheet date, if the Company’s stock price experiences an increase or decline, it could increase or decrease the Warrant liability with the change recorded as a corresponding income or expense. Any such change could have a material impact on the Company’s results of operations. The Company classified the Warrant liability as Level 3 due to the lack of relevant observable market data over fair value inputs such as the probability-weighting of the various scenarios in the arrangement. The following table represents a rollforward of the fair value of the Level 3 instrument (in thousands):



Balance at January 3, 2018 (inception)	$	3,858
Change in fair value	1,102
Balance at September 30, 2018	$	4,960